Insecurity causes the consumer climate in Germany to dip slightly

The FINANCIAL -- The increasingly insecure state of geopolitics now also seems to be influencing the mood of consumers.

There is a tangible drop in economic expectations in April, while income expectations fell only slightly by comparison. In contrast, propensity to buy is still at a very high level. GfK forecasts a decrease in consumer climate for May of 0.1 points in comparison to the previous month to 10.8 points.

The West’s confrontation with Russia in the Syria conflict is escalating and is clearly causing increasing anxiety among consumers in terms of Germany's future economic prospects. Economic expectations suffered a considerable setback in April. In the wake of this, income expectations also fell, but to a much smaller extent. In contrast, propensity to buy maintained its already very high level.

Insecurity is causing economic optimism to falter

After the previous month’s stable development, economic optimism suffered a setback in April. The economic expectation indicator loses 8.5 points, falling to 37.4. At this level, it is barely seven points higher than at the same time last year.

The escalation of the Syrian crisis and the protectionist trade policies of the United States are worrying consumers and could now also affect Germany’s previously excellent economic prospects. This development has also been exacerbated by major fluctuations in the stock markets, which also indicate an emerging insecurity among market participants and more turbulent times ahead.

However, consumers are not alone in their mood of dwindling optimism. Businesses and financial analysts also appear jittery, as the development of the ifo Business Climate and the ZEW economic expectations show.

But the general conditions in the domestic market continue to be quite favorable. Employment has set new records each month, and unemployment is falling. As a result, experts have recently even increased their forecasts for growth for this year, with the majority of them assuming that last year’s growth of 2.2 percent can even be topped in 2018.

Income expectations in the wake of the economic outlook

Income expectations cannot quite escape the downward trend in economic outlook in April. However, the losses are comparatively small. The income indicator fell by 1.4 points but is still at a respectable level of 53.5 points. However, compared with the previous year, a minus has been recorded for the first time since January (-4 points).

In the wake of falling economic expectations, income expectations have also decreased somewhat. Despite these minor losses, however, general optimism about income remains at the same level. Stable employment prospects are helping create good income growth for employees. Thanks to continuing moderate inflation, employees also have more left in their wallets in real terms. Pensioners will also benefit from the positive developments in wages, and their income will rise by a good three percent from this July.

Propensity to buy holds steady

Unimpeded by falling economic and income expectations, the mood of German consumers remains at a very good level. After a slight increase of 0.9 points, propensity to buy has risen to 60 points. The index has thus reached nearly the exact same level as the previous year. 60.2 points were recorded in April 2017.

Consumer mood is still very high. Consumers are still willing to open their wallets and spend. Firstly, there is little fear of job losses due to the excellent employment situation. This supports planning security, which should primarily lead to greater spending, particularly because the period of low interest rates in the euro area will continue, making saving an unattractive alternative. Moderate price development will also support consumer mood.

Insecurity hampers consumer climate

Following on from 10.9 points in April, GfK is predicting a value of 10.8 points for May 2018. This cancels out the gains from the previous month. The consumer climate is currently stagnating at a good level. GfK confirms its forecast made at the start of the year, whereby real private consumption will increase by about two percent in 2018, about as much as the previous year.

This assumes, however, that the emerging insecurity among consumers is not further aggravated. If the trade conflict with the United States is quickly settled and a political solution to the conflict in Syria is found, there is also an increased chance of less insecurity in the financial markets again and, consequently, less volatility.

Further escalation of these conflicts would also have a long-term adverse effect on the consumer climate. Above all, increasing protectionism in international trade would hit Germany, as an export nation, resulting in employees fearing they may lose their jobs and again being more reluctant to buy. In this case, the consumer forecast would certainly be untenable.